What is Owner Financing?

In the creative real estate investing world, the term owner financing (this and the other links on this page are to exclusive resources for our Real Estate Investor Bronze Members) is thrown around quite a bit, but what really does owner financing mean?

In the most appropriate definition owner financing is when a seller is willing to accept payments in exchange for their equity in a property.

It could be that the seller owns the property outright and is allowing the buying to purchase the property with a formal note and mortgage against the property. In this case the seller acts like a bank would.

A much more common example is when the seller is willing to accept payments for part of the purchase. For example, let’s say you are purchasing a property for $100,000. You go out and get a bank loan for $70,000 and that is given to the seller as partial payment for the purchase. Then seller is willing to accept payments on the remaining $30,000. He is accepting an offer of owner financing for the $30,000.

There are some other strategies for buying houses that, while they are probably not formally, owner financing, they look and feel an awful lot like owner financing. Here are two examples.

Let’s say a seller can not afford to make their mortgage payments anymore and they just want someone to “take over the debt”. A buyer could purchase the property subject to the existing financing and begin making the payments. In some situations, the seller may want the buyer to make payments them them and they just forward them on to the bank. Doesn’t that look a lot like owner financing?

Another situation is where the seller is willing to let a buyer lease the property while they are preparing to buy it (often referred to as a lease option or rent to own depending on how its structured). In this situation the buyer makes payments to the seller in the from a lease or rental agreement. At some point later you need to pay off the seller in full (either with a new bank loan or with cash) to actually complete the purchase part of the lease option or rent to own. Doesn’t that look a lot like owner financing as well?

So, as you can see from the above four examples, owner financing and its close cousins which look a lot like owner financing can take on many forms.

Until my next post,

James

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